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Startup Mistakes From A Former CEO / Founder

It seems that whenever I am talking with entrepreneurs who are looking to raise money, or are recently funded, and they find out that I went through the entire startup life cycle, from inception to something of a crash to salvation through sale, they ask me the same thing: “what are some of the lessons?” or “what pointers can you share?” Having read one of my more favorite bloggers for his irreverence, I was compelled to post.

It seems that they sometimes are looking for the one or two things that they can do that will guarantee, or at least dramatically improve, their probability of success. While I don’t like to call things mistakes, but rather “opportunities for excellence,” I also try to look at things in as brutally an honest way as possible. As such, in the true spirit of a postmortem, I try to focus on the negative. Make a mistake once, and you are OK. Make a mistake twice, and you are un-fundable.

Since I am now close to a full year out from having sold IMSafer, and have in fact been re-assimilated to Microsoft, I have had more than enough time to think about this topic. There are many lessons, and I am happy to share those over a beer with whomever wants to listen. However, there are two major mistakes that I made with IMSafer.

First, never, ever, take money from professional investors for whom this would not be a professional investment. Most of my funding came from old friends and bosses who work in VC, private equity and hedge funds. For them, they were investing in me, and not necessarily the company. They aren’t angel investors by trade, though some of them make angel investments from time to time. Unfortunately, even if they aren’t making the investment as a professional investment (i.e. part of their current investment vehicle), they will still expect to treat you like one of their portfolio companies. If you consider the tax that this puts on a startup, especially a seed stage startup, you can quickly find yourself overwhelmed with what I affectionately call seagull management. They will come in, make a lot of noise, crap all over everything, and leave. It’s a very hard place to find yourself, especially when you know the most important thing that you need to do is execute, not managing a board and investors commensurate with a later stage investment.

This problem further manifested itself in the security that we ultimately closed on. We spent a little more than 10% of the round paying lawyers for the complicated, ridiculous, onerous security that the investors put on us. This is my own fault for allowing this to happen, but as I found out the hard way, things get rough when you need the money. The closing documents were absurdly heavy, and we were required to go with a named Valley firm in order for the investors to feel comfortable the that deal gets done right. When you hear “named Valley firm,” what you ought to hear is “expensive.”

Second, and this is a big one, make sure that your thinking and style, for the most part, line up with whomever is writing the biggest check. If you take money from people, they are going to expect to have a voice in what you are doing. This is even more the case the bigger the checks get. When you have investors with strong opinions, things can get dicey. When your single largest investor, who is most likely going to be on your board, has a very particular way of doing things, and very strong opinions, you are likely to find yourself at the losing end of decisions. Why is this? First of all, there is the success factor. If that investor has had it (which is likely the case if they are giving you large sums of money), they tend to believe that they are right, as do others. Further, the other investors, for their part, are going to want to align with each other. One strong willed investor, with a lot of money on the table, can have very persuasive sway over the other investors.

I know in my heart that one of our critical errors as a company (a post for another time) can absolutely be chalked up to this dynamic, and my inability to stick to my gut and disagree with the investors cost us dearly. Hindsight is always 20/20, but I knew better, and I allowed myself to be blinded by his success aura and let my self doubt dominate my thinking.